[This piece, by CarzyFool, was originally posted on the Foolish workshop board last week, and was also submitted as a Bribble. If you want to see the thought-provoking thread that it started, the original message is here. Now, over to CarzyFool...]
Whilst floating in cyberspace some 9 months ago I stumbled upon the Fool. As a nouveau riche young tax exile (well I still like to think I'm young, others may disagree) with some spare cash to invest I thought I would take a closer look. The wit and reason of the logic presented in the "Ten Steps to Foolish Investing" drew me deeper into this lion's lair. Foolishly ensnared, I fell into the den.
Even today I noticed that I could "learn how to turn £100 into a million". Now as a good straight stiff upper lip British citizen I never fall for such headlines. After all it's only those gullible loud mouthed Americans that go for this kind of marketing, us Brits know better! The sensible way, or should I say Foolish way, (after all to us youth wicked is good and dark is fun), to get rich is to get rich slowly, invest in value stocks. We can't be having any of this day trading nonsense or get rich quick schemes: no, the stock market is a long term slow-moving vehicle. So there you go, I was pre-programmed to follow the Fool's mechanical strategies.
BTF, Pyad26, RS26, RS-JT -- where to start? I went for Beat The Footsie, the value-type portfolio based on picking the five shares from the FT 30 Index that have the highest dividend yield. It is based on the highly successful strategy of Beating the Dow. What I should have done, as any sensible careful investor would (!), is to follow the strategy on paper for a year. However as a young hot-blooded bull I dived straight in. After all, the backdated testing figures "proved" this strategy works.
It was September 1st 1999. The five recommended stocks (and prices) were as follows:
Allied Domecq (LSE: ALLD) 589.97
Royal & Sun Alliance (LSE: RSA) 518.81
ICI (LSE: ICI) 719.42
British Airways (LSE: BAY) 409.00
Tate & Lyle (LSE: TATE) 418.41
The aim of the BTF is to make 20% compound return per year. So how have my precious life savings performed?
Here are the figures for 3 months and 6 months:
9/1/99 12/1/99 3/1/00
ALLD 589.97 316.75 261.50
RSA 518.81 389.00 346.00
ICI 719.42 620.50 486.50
BAY 409.00 372.50 299.00
TATE 418.41 425.00 256.50
One point to note is that we need to make an adjustment for Allied as they were sold to Bass and hence I received a cash payment. The percentage return on my "Beat the Footsie" investment therefore works out to be:
Allied Domecq (LSE: ALLD) -16.16%
Royal & Sun Alliance (LSE: RSA) -33.31
ICI (LSE: ICI) -32.38
British Airways (LSE: BAY) -26.89
Tate & Lyle (LSE: TATE) -38.70
Average -29.39%
After 6 months I have lost 30%. I could have done better on the National Lottery! Oh Foolish investor, beware of mechanical strategies.
The Foolish (aka sensible) investment advice is to never jump on the bandwagon, never follow your instinct, never invest without doing your research. So the ultimate "Foolish" investor does just this. Enter yours truly. Fortunately I did not pile all my life savings into BTF, the rest of my money followed my nose! What "felt" as though it may be a good investment, no research, no logic but good old gut feelings. Here are the results (using yesterday's prices 2/3/00).
Company Buy Buy Sell Sell % change Comment
date price date price
COLT Telecom (LSE: CTM) 07/04/99 1235 Holding 3907 216.36
British Biotech (LSE: BBG) 03/08/99 17 31/8/99 29.5 73.53 1 month!
Gameplay (LSE: GAM) 03/08/99 249 23/2/00 840 237.35
Telewest (LSE: TWT) 10/08/99 227 Holding 456 100.88
Internet Tech (LSE: ITH) 26/08/99 235 Holding 342.5 45.75
Misys (LSE: MSY) 27/10/99 479 Holding 1041 117.33
Axon (LSE: AXO) 02/02/00 887 Holding 1405 58.40 1 month!
So, Foolish investor, what would you prefer -- lose 30% in a mechanical strategy or really invest Foolishly and gain up to 237%?
Go on, be really Foolish.
The Fool Responds:
As you point out, it is true that the mechanical Beating The Footsie strategy has struggled over the past two years. Many of Stephen Bland's (TMF Pyad) regular Tuesday columns have commented on the BTF's poor recent performance, and given us his thoughts on its limitations. Backtesting has shown that it works, but that's no consolation for those who've lost money, and no guarantee it will work again in the future. Also, we'd point out that some of our Relative Strength-based mechanical strategies have performed exceptionally well in recent months.
The Fool's mantra is to educate, amuse and enrich. Your hand-picked 'nose' portfolio has performed in a truly stunning fashion. That is fantastic, and is what investing in the stock market is all about. Well done indeed! But, your portfolio has only been going for a relatively short space of time. History shows that the great investors make their money by investing in great companies and holding them for the long-term. Whilst short-term gains are great, it is only the long-term which really counts. You've got plenty of years left before you can claim real success. But, if you keep going at your current rate of return, you'll obviously be an even more wealthy nouveau riche.
Got something you'd like to shout about? Why not send us a Bribble of your own, or comment on the Bribble discussion board?
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